The Wisconsin Supreme Court heard oral arguments in an important case, Orlowski v. State Farm Mut. Ins. Co., 2009AP2848, which will determine whether the collateral source rule applies to underinsured motorist (UIM) policies.

The Wisconsin Supreme Court has explained that the “collateral source rule states that benefits an injured person receives from sources that have nothing to do with the tortfeasor may not be used to reduce the tortfeasor’s liability to the injured person.” Leitinger v. Dbart, Inc., 2007 WI 84, 736 N.W.2d 1 (2007). For example, in Leitinger, the Court held that the plaintiff was allowed to receive the full amount ($154,818.51) of his past medical expenses, even though the actual amount paid by the plaintiff’s health insurer was $111,394.73.

The plaintiff in Orlowski was injured in an automobile accident arising out of the negligence of an underinsured motorist. The plaintiff recovered the policy limit from the underinsured motorist’s liability carrier and then brought a claim under her UIM policy against State Farm Mutual Automobile Insurance Company.

The claim was submitted to arbitration under the terms of the UIM policy. The arbitration panel determined that the reasonable value of the medical services was $72,985.94. The arbitration panel also determined that the plaintiff’s health insurer only paid $11,498.55 in past medical expenses. The parties stipulated that the difference between the total amount billed ($72,985.94) by the medical providers and the amount actually paid ($11,498.55) by the plaintiff and her health insurer totaled $61,487.39. The $61,487.39 was due to insurance company write-offs or reductions, and therefore the plaintiff did not pay the full amount actually billed by the health care providers.

The arbitration panel ruled that the collateral source rule did not apply and therefore the plaintiff was not entitled to $61,487 that was not paid by the plaintiff or her health insurer due to write-offs or reductions.

The plaintiff then filed a petition with the circuit court seeking an order from the court allowing her to recover the $61,487.39 in written-off medical expenses. The circuit court reversed the arbitration panel’s decision and ruled that the plaintiff was legally entitled to collect the full reasonable value of medical expenses from the tortfeasor.

However, as noted by the Court of Appeals, that court in Heritage Mut. Ins. Co. v. Graser, 2002 WI App. 125, 254 Wis.2d 851, 647 N.W.2d 385 held that the collateral source rule does not apply in UIM cases and thus the written-off medical expenses are not recoverable under UIM coverage.

In certifying the case to the Wisconsin Supreme Court, the Court of Appeals concluded that it was unable reconcile its holding in Graser with State Farm’s insurance contract and with the collateral source rule.

The Court will issue a decision by the end of its term in July 2012.

This post was authored by Andrew Cook.